Apple's iPad Mini Announcement And How To Play It, Take 2

In a Seeking Alpha article from Oct. 4, 2012, I proposed an option strategy related to the pending release of the Apple (NASDAQ:AAPL) iPad Mini, then forecast to be announced on Oct. 17, 2012, with invitations going out on Oct. 10, 2012. I suggested buying a $695/$705 bull call spread for November expiration. The top of the spread, $705, was then 5.9% above the AAPL close on Oct. 4 of $666.

Let's look at what transpired with the strategy and what medium- and long-term factors have changed, if any.

Several things have occurred:

Those who may have exercised the proposed strategy were able to get into a $690/$700 bull spread for $3.20 (as I did) or less.

"Mapplegate," supply constraint rumors for the iPhone 5 and iPad Mini, and a reversal of an injunction on the Samsung Galaxy Nexus smartphone by the U.S. Court of Appeals helped push AAPL down to recent lows (~$630).

Oct. 10, the purported invite date for the Oct. 17 announcement, came and went without invitations going out, generating delay rumors and further depressing the stock.

Apple most likely would not undertake a highly visible launch event on Oct. 23, for just a smaller device (the iPad Mini) and will most likely simultaneously announce one or more new applications for this product.

A very simple and elegant extension to its line of products would be an entertainment center remote controller application for the iPad Mini, which would allow it to compete with high-end remotes currently on the market (in the $250 price segment) and extend its foray into the living room. With this announcement, two critical components would now be in place -- a set-top box and a remote -- allowing interesting functionality based on the combination of iCloud, the TV, and various streaming services.

This possible move by Apple could be very substantial in the mid-term to long term and present a brilliantly simple next step for control of the living room. This is a new space AAPL intends to reinvent (see the Steve Jobs biography by Walter Isaacson) as it did for music players, smartphones, and tablets.

We are now possibly one day from Apple's invites for the Oct. 23 event. Once an invite goes out, a small bump (1%-2%) traditionally happens, so the following analysis pertains to possible actions on Oct.15-16, until such time that an invitation goes out.

Below is a summary of stock movements from the day before invitations were sent out ("invite 1") through announcement ("annce") and to shipment date ("ship"). The average, across three iPad announcements, for the total move between "invite 1" and "ship" dates, is 10.35%. If you also include the most recent iPhone 5 announcement, you get an average total move of 8.75%. On the rumored Nov. 2 ship date for iPad Mini, this would put the stock price at between $685 and $695.

Prdct

Invite 1

ClosPrc

Annce

ClosPrc

Ship

ClosPrc

InitMov

TotalMov

iPad

1/15/10

$205.93

1/27/10

$207.88

4/3/10

$238.49

0.94%

15.81%

iPad2

2/22/11

$338.61

3/2/11

$352.12

3/11/11

$351.99

3.99%

3.95%

iPad3gen

2/27/12

$525.76

3/7/12

$530.69

3/16/12

$585.57

0.94%

11.38%

iPhone5

8/3/12

$665.24

9/12/12

$669.79

9/24/12

$690.79

0.68%

3.84%

Average

1.64%

8.75%

Click to enlarge

So, given this collection of changes to the data, how do you continue to play the announcement if you might have pulled the trigger on a bull-call-spread (as I discussed above) or not?

If you have not yet pulled the trigger on any bull call spread strategy:

Buy a November $670/$680 bull call spread for $2.55 (as of the close on Oct. 12, 2012)

If you have pulled the trigger on any bull call spread strategy, as I did:

Buy a November $670/$680 bull call spread for $2.55 (as of the close on Oct. 12, 2012), while

selling your $690/$700 bull call spread for $1.55 (as of the close on Oct. 12, 2012), or an additional investment of $1.00, for a total cost so far of $4.20.

How to Protect Yourself Around Apple's Earnings Announcement (Oct. 25, After the Close)

Wherever the stock may be on Oct. 25 during the day, it will provide good protection to buy a bear put spread at a 5% floor below where the stock may be that day, at approximately $3.50/contract. So if the shares remain unchanged and trade at around $630 on Oct. 25 as they do now (this is not expected, since some bump is reasonable between now and then), buy a $610/$600 November bear put spread for approximately $3.50. Thus, the total cost by then will have been $7.70, with a reasonable probability for a $10.00 value per spread by expiration (~29% profit over six weeks).

Risks in This Strategy

While the likelihood of a beat in earnings is higher than not, the positive momentum from the iPad Mini announcement may be negated by a post-earnings gloom, possibly causing the stock to expire below the $680 higher railing needed for maximum profit. Not buying the bear put spread protection may increase profits, but may cause the loss of the full position in a downward scenario. While the event on Oct. 23 is all but a foregone conclusion, what if no Apple announcement comes out by Oct. 17? Then the position should be sold by Oct. 18.

Disclosure: I hold the described bull-call-spread strategy and am planning on evaluating the implementation of the outlined rollover to new spreads and the possible protection. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This is not a recommendation, but an educational piece, expressing my opinion and describing my possible actions. Please implement your own option strategies after careful analysis of your personal risk/reward considerations.